Vijay Shanthi Builders Ltd Management Discussions.

i. Industry Structure and Development

The year 2017 - 2018 as we all know has set a new benchmark for the Indian real estate sector. The implementation of demonetisation in November 2016 had the entire economy reeling until the first quarter of 2017 and the realty segment was not pardoned either, with land sales reaching stagnation due to more involvement of cash transactions. However, this eventually helped reduce land prices thereby making the end products more affordable to the consumers. By April 2017, when the markets were looking to stabilise, RERA and GST were announced in succession which again caused some inertia due to confusion among buyers and developers alike, with both awaiting the final set of RERA notifications/ legislation from their respective state regulatory bodies.

While business cycles have been affected this year due to buyers holding back purchases in anticipation of regulatory changes, and sales are still witnessing a slowdown, we are observing signs of recovery as the triple effects of demonetisation, RERA and GST have begun to shape up the sector with new standards of delivery, accountability and transparency. Post implementation of these reforms, the following impacts have been observed in the market so far:

1. More demand for 2 BHK & 3 BHK segment - apparent by a steady surge in site visits. 2. Preference for ready to move-in properties that are hassle-free of any compliance issues. 3. Willingness to pay a premium for long-standing reputed developers.

ii. Business Outlook

The real estate sector is one of the most globally recognized sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.

Indias rank in the Global House Price Index has jumped 13* spots to reach the ninth position among 55 international markets, on the back of increasing prices in mainstream residential sector.

The Indian real estate market is expected to touch US$ 180 billion by 2020. Housing sector is expected to contribute around 11 per cent to Indias GDP by 2020. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for Indias growing needs.

New housing launches across top seven cities in India increased 27 per cent year-on-year in January-March 2018.

India is expected to witness an upward rise in the number of real estate deals in 2018, on the back of policy changes that have made the market more transparent.

iii. Future Outlook

The Governments efforts to boost "affordable housing" by conferring "infrastructure status" to this segment and announcing various tax incentives will continue to attract more prominent developers to realign their products to compete in this category. The Union Cabinets decision to increase the carpet area of affordable units to 120 sq.m and 150 sq.m for MIG-I (income category Rs. 6-12 lakhs per annum) and MIG-II (income category of Rs. 12-18 lakhs per annum) segments respectively, coupled with an interest subsidy of upto 4%, will benefit both buyers and sellers as options increase for the former and inventories are cleared for the latter. Affordable housing will therefore become an important segment in every developers portfolio in 2018. Developers could also be focusing on their niche expertise in the new year, specialising in the various segments of real estate, e.g., plotted developments, residential projects, townships, and commercial spaces; and hence, specialist service providers could be emerging in each of these categories.

iv. Operational Overview

The following are the details of the ongoing and future projects of the Company.

Ongoing Projects

Project Name Location Saleable Area (Sq. Ft.)
Boulevard Vandalur- Kelambakkam Road, Kandigai 4.1 Lakhs
I Sky Villas Perungudi 0.43 Lakh
Crest Rathinamangalam 0.54 Lakhs
Fortune Square Rathinamangalam 1.82 Lakhs
The Art Nungambakkam 1.21 Lakhs

Future Projects

Project Name Location Saleable Area (Sq. Ft.)
Besta Oragadam 3.85 Lakhs
Ela Thandalam 5.22 Lakhs
Jade Pammal 0.98 Lakhs
Exotica Padur 0.76 Lakhs
Gaud Tiruvanmiyur, Rajaji Nagar 0.22 Lakhs
Fangle Perungudi 0.48 lakhs

v. Opportunities and Threats

RERA (Real Estate Regulation Act) Impact on real estate developers

The advent of RERA has created a furore among developers and there was a lot of criticism and resentment in the fraternity for this legislation. However, by and large, developers have accepted the change. It will be good to highlight the work done by organisations like CREDAI, NAREDCO, FICCI, among others, who are constantly working with the community and creating awareness about the long-term benefits of this act.

However, its a great opportunity for the developers to completely change the perception of all the stakeholders towards the sector and in particular, the developer fraternity.

a Large Developers: Clearly ahead of the curve and moving seamlessly with the law.

b Mid-size players: Excited about the opportunity and stepping up their game. A golden chance for them to raise the bar of their business.

c Distressed set of players: Creating an opportunity of consolidation in the sector. Some of them are willing to join hands with large players to remain in the market.

Benefits under GST

The highlight of the GST regime for the realty sector is the seamless availability of Input Tax Credits (ITC) paid on inputs, capital goods and input services. Under the erstwhile regime, builders would end up paying a multitude of taxes such as VAT, Central Excise, Entry Tax, LBT, Octroi, Service Tax, etc., the credits of which were not freely available against the output tax liability. However, the GST regime provides for full ITC eligibility to construction service, thereby eliminating the inefficiency ushered in by the cascading effect of taxes.

Under the GST regime, owing to the removal of state barriers, construction sector will experience a considerable relief in terms of transportation of material, machinery etc. from one state to another.

vi. Segment wise Performance

The Company has only one segment that is developing and promoting of residential apartments. Hence there is no requirement of segment wise reporting.

vii. Risks and Concerns

1. Market risk - Market risk is mainly caused by the demand uncertainty.

2. Completion risks - Completion risks refer to technical risks during and after the completion of a project. 3. Institutional risks - Institutional risks are related to the political uncertainties in a specific situation.

viii. Risk Management Policy

The Board has established a Risk Management Policy which formalizes the Companys approach to overview and manage business risks. The policy is implemented through identifying, assessing, monitoring and managing key risks across the Company.

The Audit Committee is entrusted with the task of monitoring and reviewing the risk management plan and procedures of the Company. The risk management function is complimentary to the internal control mechanism of the Company and supplements the audit function.

ix. Internal Financial Control

There are adequate internal financial controls in place with reference to the financial statements. During the year under review, these controls were evaluated and no significant weakness was identified either in the design or operation of the controls.

x. Discussion of Financial Performance

A detailed report about financial performance forms part of Directors Report to the shareholders.

xi. Human Resource Development

The Company considers its human resource as an asset of the Company. The Company prides in having well-oiled human resource machinery which has been one of the pillars for the growth of the company over the years. We have also developed an appropriate blend of professionals, constantly thinking and executing innovative and cost effective solutions to every clients requirements. Thanks to its unique professionalism that embodies a code of ethics, a committed and farsighted management team Vijay Shanthi has registered consistent growth over the years, ever since its inception.